Managing the exchange rate is one of the most significant challenges currently facing South Africa,
given its impact on cross-border trade, inflation and global competitiveness. The real exchange
rate, defined as the relative price of foreign goods in terms of domestic goods, is particularly
important among all the various measures of exchange rate (Oriavwote and Oyovwi, 2012). It
measures how much of the real GDP of other countries a domestic country receives in exchange
for one unit of its own GDP (Nyathi, 2017).
This study seeks to investigate the key determinants of real exchange in South Africa and the
impact they have on exchange rate movements. Due to its reliance on the import and export of
goods and services for survival, South Africa has an open economy that engages in competitive
global trade (Nyathi, 2017). Just like any other developing country, it is easily affected by the
trends in the economies of its primary trading partners which include the United States, Europe
and the Far East. These trends include fluctuations in exchange rates, which could have detrimental
effects on the country’s currency and thus overall economic growth and stability (Ali et al., 2015).
Understanding these dynamics not only provides information about how domestic and foreign
factors combine to affect the real exchange rate but also aids economists and policymakers in
predicting exchange rate fluctuations, control volatility, and create plans to support economic
stability and expansion.
Despite growing policy interest in real exchange rates, empirical analysis of the factors influencing
their behavior remains limited. For instance, Mpofu and Nikolaidou (2018) investigate the impact
of fluctuating exchange rates on South Africa's employment growth, and not necessarily the drivers
behind the exchange rate volatility. The lack of targeted research on the factors influencing South
Africa's real exchange rate gives policymakers little direction on how to successfully control this
volatility.
Given this gap, a comprehensive empirical study on the determinants of South Africa’s exchange
rate is crucial. This study employs the Behavioral Equilibrium Exchange Rate (BEER) model,
which captures both long-term equilibrium and short-term fluctuations, to effectively link
macroeconomic determinants to exchange rate behavior (Zhang, 2010). The study broadens the
analysis by adding variables such as terms of trade, real interest rate differentials, net foreign assets,
and productivity differentials to the commonly used variables such as commodity prices, capital
flows and trade openness.
The remainder of this paper covers a literature review, methodology, data analysis, findings, and
their significance, concluding with key insights and broader economic implications.
References:
Alia, H., Mukhtarb, U., Tijanib, B. and Auwal, M., 2015. Dynamic relationship of exchange rates
and crude oil prices in South Africa: are there asymmetries. Research Journal of Finance and
Accounting, 6(6), pp.195-200.
Nikolaidou, E. and Mpofu, T.R., 2018. Real Exchange Rate Volatility and Employment Growth in
South Africa: The Case of Manufacturing (No. 162).
Nyathi, M.C., 2017. Energy Prices and the Real Exchange Rates: A South African Perspective.
Oriavwote, V.E. and Oyovwi, D.O., 2012. The determinants of real exchange rate in Nigeria.
International Journal of Economics and Finance, 4(8), p.150.
Zhang, Z., 2010. A comparison of the BEER and Penn effect models via their applications on the
valuation of the Renminbi.